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Venture Overseas With European ETFs

Many individual investors have yet to venture overseas with their money. A comfortable way to cross the border financially for the first time is with one of the exchange-traded funds that focus on Europe.

Four exchange-traded funds offer similar exposure to West European big-cap companies: the streetTRACKS STOXX 50 (FEU), the iShares S&P Europe 350 Index Fund (IEV), the BLDRS Europe 100 ADR Index Fund (ADRU) and the Vanguard European Stock VIPERs (VGK).

Despite the different methodologies of these funds (varying from 50 to hundreds of positions), all four have posted similar returns since March, when Vanguard European Stock VIPERs, the newest fund, was listed. Longer term, the performances of the three older funds correlate very tightly.

Different Names, Same Returns
Despite varying methodologies, these four European stock ETFs have similar performances.

The four have substantial overlap in their 10 biggest investments, with all of them having the same top four holdings: British Petroleum, HSBC (HBC), Total and GlaxoSmithKline (GSK - Get Report). They all have about 40% of their assets in the United Kingdom and are concentrated in the financial and energy sectors.

They have higher dividend yields than the S&P 500's 1.8%. The lowest of the four, BLDRS Europe, yields 2.31%. iShares S&P Europe is the most expensive, charging 60 basis points, and Vanguard European VIPERs is the cheapest at 18 basis points, but their differences are largely negligible.

Despite anemic GDP growth and high unemployment in the euro-zone, the European Central Bank is in the early stages of tightening rates. Since the Federal Reserve seems to be almost done raising rates, the yield advantage of holding dollars rather than euros will decline. This will likely cause capital to flow back into euros. Some portion of that will go into European equities.

China and Russia appear to want to diversify their foreign reserve holdings, and that should benefit the euro as well.

Of course, these ETFs are strongly tied to the British pound, given their concentration in the U.K., but the correlation between the pound and the euro is very strong.

Pound and Euro vs. the Dollar
Source: Yahoo!

There is another longer-term catalyst that may make Europe a compelling investment. The euro-zone is composed of mostly slower-growing countries. The continuing integration of new European Union members such as Poland, Slovakia and Hungary -- with their faster growth rates and cheaper labor forces -- could accelerate growth in the western part of the continent.
At the time of publication, Nusbaum was long British Petroleum, Total and GlaxoSmithKline in client accounts, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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IEV $39.24 -1.40%
ADRU $19.82 -1.65%
VGK $48.69 -1.20%
FEU $30.40 -1.60%
HBC $0.00 0.00%


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